By Ross Taylor, partner, dispute resolution, Gillespie Macandrew
IF a payer under a construction contract is looking to pay less than the ‘notified sum’, they must serve a valid notice setting out the sum they intend to pay and the basis for its calculation. This has become known in common construction parlance as a ‘Pay Less Notice’.
If the Pay Less Notice is issued too late, it is rendered ineffective. The notified sum must be paid, as set out in the Housing Grants Construction and Regeneration Act 1996 (the Act). That rule is well-established. On the other hand, the Technology and Construction Court in England has recently had to consider the more unusual argument that a Pay Less Notice is invalid if it has been served too early.
Section 111 (5) of the Act provides that a Pay Less Notice cannot be given before:
- A payment notice is given by the payee. It is worth noting that this is not the same as an application or claim for payment by the payee. The scheme requires a ‘claim for payment’ to fix the due date, if there is not otherwise an inadequate mechanism for payment; and the contract may permit an ‘application for payment’ before the last date for issue of the payment notice. Separately, the Act requires a payment notice to be given no later than five days after the due date. The contract may say that it is to be given by the payer, a specified person or, alternatively that it is to be given by the payee. The latter is a rare thing, the default under the scheme is notice by the payer.
- A default notice under section 110B (2). Unless the contract provides for the giving of an application for payment, if the payer or specified person does not give a payment notice no later than five days after the due date, the payee must then give a default notice to establish a right to payment.
The payment notice, which failing the default notice, creates the notified sum.
If the contract permits an application for payment by the payee, that application is made and the payer does not then give a valid and effective payment notice, the initial application is regarded as the notified sum. In that situation a default notice cannot be given (Section 110B (4) of the Act).
Importantly, if the contract provides for the giving of a notice by the payer or notified person not later than five days after the due date, and if that notice is given, the payer may give a pay less notice before then. This scenario works when the contract requires the contract administrator to give a valuation certificate. In that event, the certificate constitutes the payment notice and the payer may independently give a pay less notice before the certificate is issued.
However, what happens if the payer issues a pay less notice in response to an application for payment, but they do not then issue a payment notice? That was the question in Placefirst Construction Ltd v CAR Construction [2025] EWHC 100 (TCC).
The payee was a sub-contractor (CAR). The payer was the main contractor (Placefirst). The contract did provide that a payment application could be given by CAR. CAR had submitted such an application. Placefirst responded to this by issuing an email with the subject line ‘CAR Construction Payless Notice and Valuation 30’. The email contained two attachments: a pay less notice and a spreadsheet entitled ‘Valuation 30’. The email described these documents as a ‘Payless Notice and Valuation 30 to support’. The pay less notice referred to Valuation 30 ‘which has been enclosed for your information’.
The Pay Less Notice argument
The court decided that Placefirst had served a valid and effective pay less notice by way of attachment of a document by that name to their email. Even though the date by which Placefirst required to serve its payment notice had not yet passed, they were perfectly entitled to issue a pay less notice in response to CAR’s application. The judge, HHJ Davies, observed that ‘the payer may be perfectly happy with the interim payment application as such, but may also wish to make a specific deduction from the valuation in his payless notice. Why should the payer not be perfectly free to do so at any time after receiving a valid interim payment application?’.
HHJ Davies considered the argument that a pay less notice could not be given before the time for giving a payment notice had elapsed was illogical:
“[T]here is no difference of substance between the content of a payment notice and a payless notice. Thus, the decision whether or not to serve a payment notice and a payless notice, or just to serve only one or the other, rests entirely with the payer. Its choice does not prejudice the payee one way or another. Indeed, if the payer had to wait until the interim payment application was deemed to have become a payee notice, that would potentially prevent the payee from obtaining an earlier payment of the amount which the payer included in its payless notice. Given that the object of the Act was to improve cashflow that would be an odd result. Further, it would surely also increase the risk of the payer being required, but failing, to serve the payless notice in what may well be a very narrow time window.”
Valuation 30 – a Payment Notice?
Although the court’s decision on the pay less notice was sufficient to determine the dispute in Placefirst’s favour, the court addressed the alternative argument by Placefirst. That said the valuation attached to the email formed the payment notice.
HHJ Davies decided that the spreadsheet did amount to a valid payment notice in its own right, notwithstanding the statement in the accompanying email that it was ‘to support’. The document identified itself as a valuation and a ‘subcontract payment certificate’, both terms which would reasonably be expected in a payment notice.
The spreadsheet contained all of the essential elements of a payment notice for the purposes of the contract; was ‘plainly intended to have a formal effect under the contract separate from the payless notice’; and was ‘not obviously purely subsidiary’ to the pay less notice.
On an objective analysis, HHJ Davies considered that the spreadsheet had all the necessary characteristics of, and was ‘intended to be a payment notice, separate and distinct from the payless notice with which it was sent’. HHJ Davies noted that ‘there must be no room for reasonable doubt as to whether the notice was intended to be a contractual notice of the nature contended for by its sender, by reference to the points made above I do not think that there was room for any such reasonable doubt on an objective basis in this case’.
Placefirst was accordingly held to have served two notices: it had served both a valid payment notice and pay less notice, each by way of its email.
Key lessons learned
If the contract provides for the giving of an application for payment, and the payee validly and effectively gives that notice, it would appear that there is no need for the payer to give a payment notice. It may go straight to issuing a pay less notice.
In such contracts, that could make the payment notice redundant. If the payee does not make an application for payment, and no payment notice is given, the payee requires to serve a default notice. After that point the payer must serve a Pay Less Notice if they want to hold money back.
The risk remains however, that in the myriad of correspondence that passes between payer and payee, it is not always obvious what may or may not constitute a particular application or notice. In dispute, this will be determined by a third-party (judge, arbitrator or adjudicator) retrospectively. The result may be uncertain. The Placefirst decision may help to streamline the statutory payment regime, but skipping the service of notices required by the contract or the act and the scheme is a dangerous game. Full compliance should still be the aim.
